The Financial Environment & The Level of Interest Rates

advertisement
9/9/2010
Ch. 2:
The Financial Environment
&
The Level of Interest Rates
C. M. Korth
1
Financial Markets

Public markets
• Where financial instruments can be
bought and resold
• Stock markets (equity=ownership)
• Debt markets
C. M. Korth
2
Money Markets

Short--term
Short
• < 1 year
• Debt only
C. M. Korth
3
1
9/9/2010
Money--Market Instruments
Money

Treasury bills (“
(“T
T-bills
bills”)
”)

Certificates of deposit (CDs)
CDs)

Commercial paper

Bankers’ acceptances

Money--market mutual funds
Money
C. M. Korth
4
Capital Markets

Medium term & long term
• > 1 year

Medium & LL-T debt

All equity
C. M. Korth
5
Capital--market Instruments
Capital

Notes: 1
1--7 years

Bonds: > 7 years

Equity
• Common stock
• Preferred stock
C. M. Korth
6
2
9/9/2010
Issuers of Financial Instruments

Stocks: Only companies

Debt:
• Governments


Federal (Treasury bonds)
Municipal (municipal bonds = “munis
“munis”)
”)
C. M. Korth
• Corporations (corporate bonds)
7
Primary Markets
Direct contact between buyer or
lender and seller or borrower

There is no resale (i.e., secondary)
market.

C. M. Korth
8
Private Markets

Commercial banks

Private placements
• Venture capital companies
• Institutional investors
C. M. Korth
9
3
9/9/2010
Public Markets

The instruments (stocks, bonds,
T-bills, etc) can be resold.
• Stock exchanges [= stock markets]
• Bond exchanges
C. M. Korth
10
Primary Markets

1st time a stock or debt
instrument is sold
• Initial public offering (IPO
IPO)
)
• Secondary, tertiary, etc


Regulated by Securities
Exchange Commission (SEC
SEC)
)
Investment bankers
C. M. Korth
11
Investment Bankers


Very different from commercial
banks (don’t take deposits)
Assist issuer to bring
g new issue
to market
• Paid commissions

Flotation
C. M. Korth
12
4
9/9/2010
“Best
Best--Efforts”
Efforts” Flotation



Investment bank advises issuer
and “floats
“floats”
” the new issue.
However,, the investment bank
does not guarantee the total
value of the sale.
The issuer does not know what
the total proceeds will be.
C. M. Korth
13
Underwriting Flotation


The investment bank (the
underwriter)
underwriter
) guarantees the
amount that the issuer will
receive.
receive
Actually buys the entire issue at
a fixed discounted price.
• Commission
C. M. Korth
14
Underwriter

Takes a lot of risk
• Could lose a lot of money, if they
can’t
can t sell the stocks or bonds at a
higher price than they paid the
issuer
• Or could make a lot of money!
C. M. Korth
15
5
9/9/2010
Well--Known Investment Banks
Well

Goldman Sachs

Morgan Stanley
C. M. Korth
16
Secondary Markets



The market for the resale of
marketable stocks and debt
= Organized exchanges
Also regulated by the SEC
C. M. Korth
17
Major Secondary Markets

Stock exchanges
• NYSE
• NASDAQ

Bond markets

Financial futures & options
C. M. Korth
18
6
9/9/2010
Financial Derivatives Markets

Future and forward contracts

Options and warrants

Index contracts

Swaps
C. M. Korth
19
Market Specialists

Brokers: Bring buyers & sellers
Brokers:
together
• Do not own the shares
• Charge a commission

Dealers:: The “market
Dealers
“market makers”
makers”
• Buy for & sell from own account
C. M. Korth
20
Foreign Secondary Markets

Foreign domestic markets

“Off--shore” markets
“Off
C. M. Korth
21
7
9/9/2010
Financial Environment Summary:
The Players

Commercial bankers

Investment bankers

Dealers [the “market makers”]

Brokers
C. M. Korth
22
Financial Environment Summary:
The Regulators

For banks:
•
•
•
•

Federal Reserve
C
Comptroller
t ll
off the
th Currency
C
FDIC
State regulators
For stock & bond markets:
Securities Exchange Commission
C. M. Korth
23
Financial Environment Summary:
Institutional Investors

Insurance companies

Pension & other retirement funds

Mutual funds
• 401( k)
• Individual retirement accounts (IRAs
IRAs)
)
24
8
Download